Spotlight on the economy: Watching for signs of deflation

The ‘d’ word is starting to re-enter the lexicon as traders speculate on the causes ofthe mass sell-offs in gold and other commodities. As the Labor Department reports consumer price index data on Tuesday at 8:30 a.m. – economists in a MarketWatch-compiled poll are forecasting a 0.1% monthly drop for March, and a 0.2% gain when stripping out food and energy – it’s the deceleration in prices that is taking the limelight.

Steve Ricchiuto of Mizuho Securities USA says the U.S. is importing deflation, noting the 0.5% monthly and 2.7% yearly drop in import prices in March. “The deflationary pressures building up in the economy are driving our call that the 10-year note will revisit the July 2012 low later this spring or summer,” he told clients.

J.P. Morgan is seeing much the same thing – their measure of global inflation was at 2.5% in February, a full percentage point drop over the last year. In a research note, the J.P. Morgan economists note that decelerating inflation isn’t all bad, when it’s driven by increased supplies, like in agriculture or through the reduction of oil supply bottlenecks. But much of the decline, they say, “is the outcome of a period of sustained subpar global growth.”

The inflation outlook is sure to be a hot topic with the wave of Fed speakers for Tuesday, including New York Fed President William Dudley, who’s speaking from Staten Island at 8 a.m. Eastern. Fed Vice Chair Janet Yellen will be speaking on a panel discussion on monetary policy since the crisis at the International Monetary Fund, which separately will release its world economic outlook at 9 a.m. Fed. Gov. Elizabeth Duke and Minneapolis Fed President Narayana Kocherlakota also are on the docket. At the moment, the biggest question in Fedland is how long the central bank will continue buying $85 million worth of securities. A survey of primary dealers released by the New York Fed last week say the tapering will begin in December, at which point, the Fed will be buying $70 billion worth of securities, divided equally between Treasurys and mortgage-backed securities.

Meanwhile, there’s more data as well, with the Commerce Department releasing housing starts for March at 8:30 a.m., and the Fed releasing March industrial production at 9:15 a.m. Economists expect starts to have climbed to an annualized rate of 933,000 from 917,000 in February, and for industrial production to have gained 0.3%.

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